UBS pins hopes for growth on DC plans of the future

Executives at UBS Global Asset Management Americas Inc. are betting that the defined contribution industry of the future will provide a growing market for its alternative investments and a retirement income option.

These are strategies that have met with little to no success for UBS and most of its competitors.

And while waiting for that time to come, UBS is suffering declining DC assets under management even as the segment of the market it is in — the investment-only part — keeps growing.

“We are positioning strategies not where the industry is right now but where it's going to be, which is basically liquid alternatives and into retirement income,” said Shawn Lytle, managing director of UBS Global Asset Management and head of the asset management unit's American subsidiary.

“Those are not where the big flows have been,” he added. “We know we need to be patient.”

UBS' DC assets under management dropped to $912 million as of Dec. 31, 2012, according to data the firm provided to Pensions & Investments. Those assets have skidded steadily from $2.16 billion in 2008, a decline of 58%.

During that same period, the overall defined contribution investment-only industry's assets have grown 56% to $4.23 trillion, as tracked by P&I.

“In the last few years, we have not grown (and) we have lost one significant client,” said Mr. Lytle, who declined to identify the client. He said UBS' defined contribution business has stabilized, although he didn't provide updated AUM figures.

“In terms of the new strategies, we have not seen a new takeup of those strategies yet because they are a little bit more forward-thinking,” he said. “We recognize that. We don't want to be a me-too provider, and we know that these are the areas that we can really distinguish ourselves.”

The alternatives strategies, the first of which was introduced as long ago as 2003, are:

nU.S. real estate, as part of a real estate fund of funds, which combines private real estate and some public securities and cash equivalents, introduced in October 2012;

n“Managed inflation,” containing commodities, floating-rate bank notes, energy stocks, real estate investment trusts and Treasury inflation-protected securities, introduced in September 2012;

nOpportunistic fixed income, introduced in May 2006, and a mutual fund version introduced in November 2010; and

n“Dynamic alpha,” an asset allocation strategy with a targeted risk and return, reflecting “the spirit of an unconstrained global tactical asset allocation portfolio,” introduced in November 2003.

All are internally managed, and all but managed inflation have some clients.

Investment consultants say UBS will have a difficult time emphasizing alternative investments, which account for a small portion of DC plan assets. The company also faces rough sledding with lifetime income options, which haven't attracted much interest by DC plans, especially the larger ones UBS is pursuing.

Alternative investments represented 1.4% of aggregate assets under management in 2012, according to P&I's annual survey of money managers running DC assets, up from 1.3% in 2011.

“Any new (investment) strategy in DC takes a long time” to gain acceptance, said one consultant, who requested anonymity. “This is a tough market. Things move slowly.”

Another consultant, also requesting anonymity, added: “This is a huge mountain for them to climb. These are not products that can grow overnight.”

UBS' defined contribution assets represent a tiny portion of UBS Global Asset Management, which had $634.2 billion in assets under management at the end of 2012, according to P&I's 2013 survey of money managers. That figure includes $150.1 billion for UBS Global Asset Management Americas Inc.

UBS executives have decided the best way to grow the DC business is to take greater advantage of the firm's relationships with its defined benefit plan clients.

As more DB plans are closed to new participants or frozen, and as more sponsors move to defined contribution, Mr. Lytle said UBS is focusing on “how can we help those clients as they are trying to make their DC plans more sophisticated.”

The firm had $32.4 billion in defined benefit AUM at year-end 2012, according to P&I data.

“We have a 30-year history of serving DB plans,” Mr. Lytle said. ”That has always been the foundation and the cornerstone of our business.”

Mr. Lytle said he doesn't want to place a size limit on potential clients. An ideal client would be one with a DB and DC plan, with sophisticated DB plan investments, that is “thinking about how they can bring that institutional mindset and investment acumen into the DC plan and specifically into the default option,” he said.

Mr. Lytle said the “the real game changer” for UBS' DC strategy is a retirement income option — an annuity embedded in a 401(k) plan. Although UBS has been marketing its lifetime income strategy since March 2011, it doesn't have a client yet.

Some other providers of embedded-annuity strategies have few or no clients. BlackRock Inc., New York, for example, doesn't have a client even though it has been marketing its lifetime income version since October 2007. (P&I, Oct. 28).

Despite the reluctance of sponsors — especially large ones — to adopt an in-plan lifetime income strategy, Mr. Lytle said UBS has made “a firm commitment” to provide this option. “We are going to be patient to let the (Department of Labor) regulations become clearer,” Mr. Lytle said.

Executives at UBS and its competitors say they believe existing DOL rules are sufficient to provide fiduciary protection for sponsors. However, lifetime-income providers and DC consultants say DC executives often cite the need for more DOL safe-harbor rules as a major reason for holding off on adopting lifetime income options.

The Labor Department recently posted in its regulatory agenda for 2014 a notice saying it is “developing proposed amendments to the annuity selection safe harbor primarily focused on the condition in the safe harbor relating to the ability of the annuity provider to make all future payments under the annuity contract.” The DOL provided no details; proposals are expected to be issued in October.

The UBS lifetime income strategy uses an advanced life deferred annuity as one of the investments of a collective investment fund that also contains equities, fixed income and inflation-protection securities. The allocation to each component changes as a person grows older. UBS views the annuity as an asset class. UBS makes the allocation and investment decisions. Insurance and annuity products are offered by and guaranteed by third-party insurance companies.

As participants age, their fixed-income and equity allocations decrease and the inflation-protection and annuity allocations increase. At retirement age, the annuity portion of the fund will separate from the other components, and the participant may cash out or save the annuity for future guaranteed income that provides them with monthly payments.

In describing this option, UBS uses a hypothetical example of a person retiring at 65 and then having monthly annuity payments start at age 80. “The primary risk that is being managed by the deferred annuity is longevity risk,” said Louis Finney, senior capabilities strategist. “We tend to use 65 and 80 for clarity and simplicity; but for a given plan the ages can vary to meet the needs of the plan's participants.” n